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What is a Foreign Official Under the FCPA?

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United States v. Esquenazi: Eleventh Circuit Becomes the First Court of Appeals to Decide What Constitutes an “Instrumentality” of a Foreign Government Under the FCPA

Recently, the Eleventh Circuit became the first Court of Appeals to decide the question of whether an entity constitutes an “instrumentality” of a foreign government for purposes of the FCPA.

I. Facts

Two co-owners of a telecommunications company in Florida, Terra Telecommunications (“Terra”), purchased phone time from foreign vendors and resold minutes to customers in the United States. One of Terra’s main vendors was Telecommunications D’Haiti SAM (“Teleco”). Over time, Terra’s outstanding debt to Teleco increased based on previous agreements between the two companies.  To relieve some of the debts they owed to Teleco, Terra sent monies to officers of Teleco. Later on, the two co-owners of Terra also made payments to a shell company owned by other Teleco officials.

II. FCPA Provisions Addressing “Instrumentality” of a Foreign Government

The anti-bribery provision of the FCPA specifically prohibits a “domestic concern” from:

“Making use of the mails or any means …of interstate commerce corruptly in furtherance of a bribe to “any foreign official,” or to any person, while knowing that all or a portion of such money or thing of value will be offered, given, promised, directly or indirectly to any foreign official…

For purposes of  —-

influencing any act of decision of such foreign official …in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person.”

See 15 U.S.C. Section 78dd-2(a)(1),(3)

A “domestic concern” includes:

  • Any individual who is a citizen, national, or resident of the U.S.; and
  • Various business entities, e.g., partnerships, corporations, organizations, business trusts, so long as the business entity has its principal place of the business in the U.S. or is organized under the laws of the U.S. or a territory, possession, or commonwealth of the U.S., e.g., Puerto Rico.

See 15 U.S.C. Section 78dd-2(h)(1)(A)-(B)

A “foreign official” includes, among other things:

  • Any officer or employee of a foreign government;
  • Any department or agency of a foreign government; and
  • Any instrumentality of a foreign government.

See 15 U.S.C. Section 78dd-2(h)(2)(A)

III. The Esquenazi Decision

A. Two Prong Test for “Instrumentality” in Esquenazi

The court upheld the Teleco owners’ convictions under the FCPA, reasoning that, the district court’s jury instructions with respect to what constituted an “instrumentality” of a foreign government were proper. The jury instructions in dispute were as follows:

To decide whether Teleco is an instrumentality of the government of Haiti, you may consider factors, including:

One, whether it provides services to the citizens and habitants of Haiti

Two, whether its key officers and directors are government officials or are appointed by government officials

Three, the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government mandated fees.

Four, Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions

And, five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

Terra contended that these instructions caused them to convict Terra simply based on the fact that Teleco was a government owned entity providing a service. The Eleventh Circuit disagreed finding that the instructions given to the jury did not mislead the jury or incorrectly state the law. The Court then established a two prong test for deciding whether an entity might constitute an “instrumentality” of a foreign government:

  • First Prong – Whether the foreign government “controls” the entity
    • Foreign government’s formal designation of that entity;
    • Whether the government has a majority interest in the entity;
    • The government’s ability to hire and fire the entity’s principals;
    • The extent to which the entity’s profits, if any, go directly into the government fisc;
    • The extent to which the government funds the entity if it fails to break even; and
    • The length of time that these “indicia” have existed, e.g. the length of the government’s control over the entity.
  • Second Prong – Whether the entity performs a function the controlling government treats as its own.
    • Whether the entity has a monopoly over the function it provides;
    • Whether the government subsidizes the costs associated with the entity providing services;
    • Whether the entity provides services to the public at large in the foreign country; and
    • Whether the public and the government of that foreign country generally view the entity to be performing a government function.

B. Deliberate Ignorance Instruction

At trial, the court instructed the jury that they may find that the co-owner knew that the payments to foreign officials that he was authorizing were illegal if they found that he deliberately avoided knowledge of the fact that payments to those foreign officials were unlawful. The government argued that such an instruction was proper since, as a financial executive, he was in a position to know the illegality of the payments he was making.

The Eleventh Circuit disagreed finding that there was no evidence showing that the co-owner deliberately avoided learning whether the payments were illegal. However, the court found he actually knew that the payments he was authorizing were illegal, and therefore, the faulty instruction amounted to harmless error.

C. Knowledge that a Bribe Would Be Passed Along to a Foreign Official

At trial, the Court specifically instructed the jury that they can only find the defendant’s guilty if they knew – had actual knowledge– that bribe or thing of value would ultimately reach the hands of a foreign official.  The Eleventh Circuit specifically approved of this instruction.

D. Sentencing

The federal sentencing guidelines provide for a 16 level enhancement if the value of the benefit received or to be received in return for a bribe is more than $1 million but less than $2.5 million. See U.S.S.G. Section 2B1.1(b)(1). Defendants argued that this enhancement did not apply to them, individually, when the value of the benefit received by Terra (the corporation) exceeded $1 million. The Eleventh Circuit found that defendants waived this argument since they did not raise it at sentencing and, instead, argued that a lesser enhancement was warranted to maintain parity with their co-defendants who pleaded guilty.

IV. Potential Impact of the Decision

Haiti Teleco was an easy case for the court to decide since history demonstrated that the Haitian government controlled telecommunications and telecommunications was widely viewed as a service provided by the Haitian government . Undoubtedly, there will be closer cases where a more thorough application of the Esquenazi factors will be required and the two prong test outlined in Esquenazi raises several important questions:

  • Will the Department of Justice and the Securities Exchange Commission apply the factors listed in the Esquenazi two part test?
  • How will the factors listed in the Court’s two prong test impact businesses operating in certain industries, and their behavior, e.g., oil, mining, pharmaceuticals, health care, and banking?
  • Will government attorneys, or U.S. and foreign regulators treat formal declarations from a foreign government that an entity is not performing a function of that foreign government as prima facie evidence that the entity is not an instrumentality of a foreign goverment for purposes of the FCPA?
  • Does this two prong test validate the Department of Justice’s current interpretation of sovereign wealth funds (SWF’s) as “instrumentalities” of foreign governments? If so, how will this affect private investment firms’ (private equity and hedge funds) decisions to obtain investments from SWFs?

The decision also underscores the limitations of a deliberate ignorance instruction with respect to corporate executives. While Esquenazi held that the deliberate ignorance instruction was harmless error because the defendant actually knew about the illegal payments he was authorizing, the court also rejected the premise for that instruction. Indeed, the government seemed to argue that, because defendant was a corporate executive of Teleco, he should have known that the payments that he was authorizing were unlawful. Put simply, the government argued that the deliberate ignorance instruction was proper because knowledge may be imputed to the defendant based on his position as a corporate executive. Fortunately, the Eleventh Circuit recognized that, permitting a jury to find FCPA liability under this quasi-responsible corporate officer theory was problematic.

Equally as important, the decision illustrates that, if a corporate executive gives something of value, e.g. a charitable contribution, which ultimately reaches the hands of a foreign official, then the corporate executive must actually know that the contribution will reach that official to be liable under the anti-bribery provisions of the FPCA.

In sum, individuals and companies operating in high risk industries or countries with lax anti-corruption laws, or both, should be aware of the Esquenazi decision and should evaluate whether, and to what extent, the decision might impact future business arrangements and investment decisions.

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South Florida Hospital News Announces Opening of Feldman Firm PLLC

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http://southfloridahospitalnews.com/page/Andrew_S_Feldman_Opens_Feldman_Firm_PLLC/9197/2/

Andrew S. Feldman recently announced the opening of Feldman Firm, PLLC, which is located in downtown Miami, FL. The Firm focuses on, among other things, assisting healthcare providers and practitioners in regulatory enforcement matters and administrative actions related to Medicare and Medicaid fraud and abuse, including audits, program exclusion matters, and payment suspensions and reviews. The Firm will also implement compliance programs for providers. Prior to beginning Feldman Firm, PLLC, Feldman worked for a renowned white collar defense attorney in Miami and a national law firm in Fort Lauderdale

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Electronic Health Records and Laboratories

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OIG Issues Advisory Opinion Relevant to Electronic Health Record Providers and Laboratories

OIG issued its advisory opinion No. 14-03 today.

Background: A publicly traded clinical laboratory (“Lab”) receives a substantial amount of its business through referrals from physicians (“Referring Physicians”) ordering the Lab’s tests. The Lab entered into an operating agreement with an EHR Provider (Provider), which allowed the Referring Physicians to receive test results from the Lab through the Provider’s services and to have those test results incorporated into their patients’ electronic charts. The Referring Physicians could also use the Provider’s services to generate and transmit an order to the Lab via facsimile, but they could not use the Provider’s services to send an electronic order that automatically would be incorporated into the Lab’s information system.

Proposed Arrangement: Under the proposed arrangement, Referring Physicians may now use the Provider’s service to electronically transmit and generate orders to, and receive results from, the Lab. Each time a Referring Physician generates an order for the Lab using the Provider’s services, the Lab is displayed as an “in network” Lab. With the “in network” designation, the Lab pays the Provider a per-order fee in return for each set of tests a Referring Physician orders from the Lab using the Provider’s services. However, if a Referring Physician orders a test through Provider’s service from an out of network laboratory, i.e., not the Lab, then the Referring Physician must pay a transmission fee of $1.00 to the Provider for per order. The Per-Order Fees are not capped, and decrease as the number of test orders the EHR Provider transmits to Requestor increases.

Analysis:  OIG first emphasized that “the efficient exchange of health information between health care providers, practitioners, and suppliers is a laudable goal,” but noted that “when the exchange takes place in the context of patient referrals,” we must determine whether the methods used to obtain that goal implicate the anti-kickback statute.

OIG then determined, without considering any of the applicable safe-harbors to the anti-kickback statute, that the proposed arrangement posed more than a minimal risk of fraud and abuse, and, in doing so, reinforced the following points:

  • The per order fee paid by the Lab for each test a Referring Physician orders using the Provider’s services relieves the Referring Physicians of a financial obligation;
  • Under this arrangement, Referring Physicians have the option to pay a transmission fee or avoid paying that same fee based on their choice of laboratory, and therefore, “this fee structure could potentially influence Referring Physicians’ referral decisions in a material way;”
  •  The “arrangement appears to permit [the Lab] to do indirectly what it cannot do directly; that is pay compensation to the Referring Physicians…in return for the Referring Physicians’ laboratory test referrals”;
  • Because the Lab offers additional software that Referring Physicians can use to electronically submit orders to the Lab, which are thereafter incorporated into the Referring Physicians’ patient charts, the arrangement does not “provide any additional technological benefits to the [Lab];” and
  • Although the per fee charge is minimal and such fees are unlikely to influence a physician’s referral decisions in any meaningful way, “the risk that the per fee could influence a referring physician’s decision-making increases as the number of referrals increases and physicians typically order laboratory tests with considerable frequency.”

Takeaways: The recent OIG opinion demonstrates that healthcare providers, including diagnostic and clinical laboratories, would be well-advised to evaluate all existing relationships with IT vendors and Electronic Health Records providers. Indeed, according to the opinion, healthcare providers should carefully analyze all indirect compensation arrangements or agreements with third party vendors, to ensure that the agreement or relationship does not relieve, or have the potential to relieve, a referral source of a financial obligation since such arrangements implicate the anti-kickback statute. Furthermore, the opinion shows that even a “nominal” fee of $1.00, which may be reduced, may implicate the anti-kickback statute when there is a potential for an increase in referrals. Lastly, the opinion illustrates that OIG will not hesitate to find that a proposed arrangement involving physicians and clinical laboratories poses more than a minimal risk of fraud or abuse since physicians generally order from labs with “considerable frequency.”

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Medicaid Fraud Control Unit FYE 2013 Report

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Medicaid Fraud Control Unit Report for 2013 was released last week by the Office of the Inspector General for the U.S. Department of Health and Human Services.  Among the top 10 highlights were:

  1. There were 879 civil settlements totaling more than $2.5 billion dollars based on Medicaid Fraud Control Unit (MCFU) investigations and prosecutions
  2. Virginia MCFU recovered almost half of the national total in connection with settlement with Abbot Laboratories for marketing  Dapokate for uses not approved by the FDA as safe and effective; illegal marketing to nursing homes; and illegal remuneration paid to long-term care pharmacies and facilities.
  3. MCFUs in Texas ($196 million), Louisiana ($187 million), New York ($134), Tennessee($78 million), California ($57 million), and Illinois ($60 million) all recovered more than $50 million dollars.
  4. MCFUs in Florida, Ohio, Texas, California, Indiana, New York, Mississippi, Massachusetts, and New York conducted the most investigations for FYE 2013.
  5. 74% of the total criminal convictions in 2013 were based on fraud.
  6. 26% of the total criminal convictions in 2013 were related to home health care aides
  7. Pharmaceutical manufacturers accounted for 62% of the total civil settlements and judgments with MCFUs.
  8. Pharmacies, Home Health Care Agencies, Hospitals, and Nursing facilities entered into a substantial amount of civil settlements and judgments with MCFUs.
  9. OIG excluded 1022 subjects as a result of MCFU investigations which is a substantial increase from 2012 (746 subjects).
  10. The Report expressed concerns about the lack of fraud referrals from managed care organizations and emphasized that MCO’s are critical fraud referral sources given the amount of Medicare beneficiaries covered under managed care arrangements.

The Firm has experience representing health care providers in Medicaid fraud prosecutions and investigations. It is critical to retain an attorney that understands the scope and direction of these investigations. Please feel free to contact the Firm if you suspect or receive notice of a Medicaid fraud investigation.

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What is the Physician Payments Sunshine Act?

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What is the Physician Payments Sunshine Act?

The Physician Payment Sunshine Act, part of the Affordable Care Act, was passed by Congress in 2010. Under the Sunshine Act, manufacturers of drugs, medical devices, biological, or medical supplies, and group purchasing organizations, are required to report all financial transactions/transfers of value to physicians and teaching hospitals. Ownership and investment interests of physicians and their immediate family members in these companies are also reportable. Manufacturers are required to submit the compiled reports to the Center for Medicare and Medicaid Services (CMS) on an annual basis. The information will then be made available on a public, searchable website. The program implementing the requirements of the Act is called “Open Payments” and will be administered by CMS.

Who Needs to Report

  1. Entities operating in the U.S. who are engaged in the production, preparation, propagation, compounding, or conversion of medical devices, medical supplies, biologicals, and drugs.
  2. An entity under common ownership (5% indirect or direct) with an entity engaged in the production, preparation, propagation, compounding, or conversion of medical devices, medical supplies, biologicals, and drugs and which provides assistance or support to such entity with respect to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological or medical supply.
  3. GPO’s including physician owned distributors

What is Assistance or Support?

Providing a service or services that are necessary or integral to the production, preparation, propagation, compounding, conversion, marketing, promotion, sale, or distribution of a covered drug, device, biological or medical supply.

What is Operating in the U.S.?

  1. Has a physical location within the United States or in a territory, possession, or commonwealth of the United States; or
  2. Otherwise conducts activities within the United States or in a territory, possession, or commonwealth of the United States, either directly or through a legally-authorized agent. 
  3. Includes foreign entities with a business presence or operations in the U.S.
  4. Includes U.S. entities making payments to foreign entities which are then transferred to a physician, teaching hospital, or other covered entity

Who Is Excluded

1. Entities meeting the definition of “applicable manufacturer” that are engaged in the production, preparation, compounding, or conversion for the solely for use by or within the entity itself or by the entity’s own patients.

2. Wholesalers, distributors, repackaging entities

3. Pharmacies and compound pharmacies as long as the compound pharmacy meets certain conditions.

What must be reported?

  1. Transfers of value made by a GPO or an applicable manufacturer (defined as something with “discernible economic value,” i.e, lunch or dinner or concert tickers) in connection with or in reference to a medical device, medical supply, drug, or biological to a physician or a teaching hospital (includes an academic medical center)
  2. Indirect payments or other transfers of value made by a GPO or an applicable manufacturer  to physicians, teaching hospitals or physician owners or investors through a third party where the entity requires, instructs, directs, or otherwise causes the third party to provide the payment to a physician, teaching hospital, or a physician owner or investor.
  3. Investment interests held by physicians (or their immediate family members) in applicable manufacturers
  4. Physician ownership and investment interests in GPOs

What Drugs, Biologicals, or Devices are covered?

  1. Drugs or biologicals are only covered if they require a prescription to be dispensed
  2. Medical devices that require premarket approval or premarket notification pursuant to applicable FDA regulations
  3. Devices, supplies, biologicals, and drugs are only covered if payment may be made through a federal healthcare benefit plan or a state plan (or a waiver of such plan), either separately  or as part of a bundled payment plan or system.

What must be reported in Phase I?

Phase I reporting includes the reporting of aggregate 2013 payment and investment interest data to CMS.

Phase II (May 2014)

Phase II reporting will begin in May of this year and will require applicable manufacturers and GPO’s to provide CMS with more specific, particularized payment data with respect to “transfers of value.”

Conclusion

14 days remain for group purchasing organizations (GPOs) and applicable manufacturers of medical devices, medical supplies, biologicals, and drugs to file their Phase I report with the Center of Medicare and Medicaid Services through the Open Payments system. Although the deadline is creeping closer and closer, it is not too late to make a good faith effort to comply with the new Rule. Indeed, entities that are required to file a report would be well-advised to do so since penalties for failing to report are severe. Entities that knowingly fail to file a report may be fined up to $1,000,000.00 whereas entities that fail to report a payment may be fined up to $10,000.00 for each payment they fail to report.

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